India will remain the world’s fastest-growing major economy despite demonetisation, Brexit and Trump

That’s the Narendra Modi government’s outlook for Asia’s third-largest economy, despite the shock of demonetisation and a range of uncertainties, both at home and abroad.

India’s real GDP growth will remain between 6.75% and 7.5% in the 2017-2018 financial year, the government said in its Economic Survey, an annual document that deciphers the state of the economy.

“Even under this forecast, India would remain the fastest growing major economy in the world,” the survey said, although the International Monetary Fund earlier this year estimated that China was growing faster than India.

In the current financial year, real GDP is projected to grow at about 7%, the survey added, significantly lower than the 7.6% growth the economy registered in 2015-2016.

In a rather professorial presentation after the survey was tabled in parliament, India’s chief economic advisor, Arvind Subramanian, emphasised that the projections of lower growth weren’t only because of the impact of demonetisation. Strengthening oil prices, for example, are also a factor, according to the survey.

Quoting John Maynard Keynes and Amitabh Bachchan in quick succession, Subramanian underlined the Modi government’s ability to stabilise the economy and undertake key reforms, including getting the goods and services tax (GST) bill through parliament.

“Macroeconomic stability is easy to overlook and become complacent about,” he added.

The coming financial year won’t be particularly easy either. The economy will continue to deal with the effects of demonetisation while also contending with a range of global uncertainties. The biggest international risks to the Indian economy that Subramanian listed out include rising oil prices, trade-related tensions between major economies, and growing protectionism.

Here are a few highlights from the survey:

Demonetisation

The survey explains how Modi’s historic move to ban two high-value currency notes will have a transitional impact on the economy.

“The cash squeeze in the meantime will have significant implications for GDP, reducing 2016-17 growth by 0.25 to 0.5 percentage points compared to the baseline of 7%. Recorded GDP will understate impact on informal sector because, for example, informal manufacturing is estimated using formal sector indicators (Index of Industrial Production),” the survey says.

However, it also says that these effects will disappear soon as the currency circulation normalises. Apart from dealing with the economic impact, Indians have also suffered due to poor implementation of the currency ban. Subramanian, though, chose to remain silent about this.

“Economic Survey will not speak about the implementation,” Subramanian said during the press conference in New Delhi. Those in the informal sector have had to face hardships, but there are potential long-term benefits, he said.

Here are the top positives and negatives of demonetisation as highlighted by the Economic Survey:

GDP growth fell mainly as cash crunch led to a slump in demand. Supply chains were hit because of unavailability of sufficient working capital.

Could support economic growth in the long-run if it succeeds in bringing down corruption.

Companies and households faced heightened uncertainty so they delayed investment and purchase decisions.

The government and the RBI will get wealthier when unreturned cash is destroyed.

Real estate prices and private sector wealth took a hit as some high-denomination notes were not returned.

In the long-term, demonetisation may lead to higher tax collections as it expands and improves compliance.

Universal basic income

For the first time, an Economic Survey broached the idea of a Universal Basic Income (UBI): unconditional and universal cash transfers to the poor.

The survey argues that a UBI could be provided as an alternative to the hundreds of existing government-run welfare programmes in India, which have been mostly ineffective in reducing poverty, particularly in regions suffering from poor governance.

However, Subramanian cautioned that the success of the scheme depended on certain prerequisites, such as better financial inclusion, the wider spread of the the Aadhar identification scheme, and an agreement on how to share the cost of implementation between the centre and states. He estimated that in reducing poverty to 0.5%, the cost of the scheme could be around 4-5% of the GDP, compared to existing food, petroleum, and fertilizer subsidies (as well as certain “middle-class” subsidies) that account for around 3%.

“What the survey is saying is it’s a very new compelling idea; it’s an idea whose time is ripe for further discussion and deliberation, and not necessarily immediate implementation,” Subramanian said.

The goods and services tax

The Economic Survey describes the GST as “a bold new experiment in the governance of India’s cooperative federalism” that could push India’s GDP growth to between 8% and 10%.

Last August, the Indian parliament passed the Constitution (122nd Amendment) Bill, 2014, which allows the roll-out of the GST bill. First mooted in 2000, GST will replace at least 17 state and federal taxes and bring them under one unified tax structure. It is expected to roll out on July 1.

India’s existing tax system consists of direct taxes, such as income tax, and indirect taxes, which includes the numerous central and state levies like value added tax, sales tax, octroi, and luxury tax. A council set up to decide the rate of taxation has proposed a four-tier tax structure of 5%, 12%, 18%, and 28% with lower rates for necessary items and highest for luxury items.

The GST, the survey explains, will “create a common Indian market, improve tax compliance and governance, and boost investment and growth.”

However, there are concerns over its implementation and how long it’ll take for its benefits to kick in: “The transition to the GST is so complicated from an administrative and technology perspective that revenue collection will take some time to reach full potential. Combined with the government’s commitment to compensating the states for any shortfall in their own GST collections (relative to a baseline of 14% increase), the outlook must be cautious with respect to revenue collections. The fiscal gains from implementing the GST and demonetisation, while almost certain to occur, will probably take time to be fully realised.”

Public sector asset rehabilitation agency

The survey proposes the setting up of a public sector asset rehabilitation agency (PARA) that can “take charge of the largest, most difficult cases, and take politically tough decisions” to reduce non-performing assets at Indian banks.

An NPA is a loan extended by a bank on which it hasn’t received interest or principal for over 90 days.

“Gross NPAs have climbed to almost 12% of gross advances for public sector banks at end-September 2016,” the survey notes. “At this level, India’s NPA ratio is higher than that of any other major emerging market, with the exception of Russia.” The survey believes such a situation has led to a slowdown in credit growth which has hit sectors, especially the medium and small scale enterprises.

The Economic Survey also suggests that such a professionally-run central agency will be better poised to overcome the coordination and political issues involved in handling NPAs.